Question

Edgar owns 234 shares of Cawh Consolidated Bank, which he bought for $21.38 apiece. Each share pays a yearly dividend of $3.15. Edgar also owns two par value $1,000 bonds from Cawh Consolidated Bank. The bonds had a market value of 105.166 when he bought them, and pay 8.3% interest yearly. Which aspect of Edgar’s investment in Cawh Consolidated Bank offers a greater percent yield, and how much greater is it?
a.
The stocks have a yield 6.43 percentage points greater than that of the bonds.
b.
The stocks have a yield 6.84 percentage points greater than that of the bonds.
c.
The bonds have a yield 1.05 percentage points greater than that of the stocks.
d.
The bonds have a yield 9.13 percentage points higher than that of the stocks.

Answer 1

Compute each yield (income divided by purchase price).

Stocks:
Dividend yield = 3.15 / 21.38 = 0.147389... = 14.74%

Bonds:
Price per bond = 105.166% of $1,000 = $1,051.66
Yield = 83 / 1,051.66 = 0.07894... = 7.89%

Difference = 14.74% − 7.89% = 6.84 percentage points.

Answer: b.